Tariffs create near-term uncertainty for the US budget
Tariff revenue - which pays for most of the US government's tax cuts - is running behind forecasts in the near term.
Add us as a preferred Google source
A key risk around the US fiscal outlook – and, for that matter, the fiscal outlooks of all advanced economies - relates to the pressure for more defence spending, although in the US there is also some near-term uncertainty around tariff revenue.
As is well known, the US faces a challenging fiscal outlook, with federal debt held by the public forecast by the CBO to increase from 99% of GDP to 118% over the next ten years, exceeding the all-time peak of 106% reached in the final year of World War 2.
Rising public debt reflects average budget deficits of 6.0% of GDP over the period, up from last financial year’s outcome of 5.7% of GDP.
The monthly estimates are exceptionally volatile, but the US deficit is currently tracking a little above this trajectory, at an estimated 6.2% of GDP in May in smoothed terms, and there is some near-term pressure from tariff revenue coming in below forecasts.
Tariffs are important to the US budget because they are expected to raise an average of 0.9% of GDP per annum, paying for most of the government’s income tax cuts that are worth 1.2% of GDP, with cuts to health and welfare worth 0.4% of GDP making up the rest.
However, tariff revenue is currently about 10% below the CBO’s forecast profile, or about 0.2% of GDP, which, if sustained, would see public debt end up slightly higher at 119% of GDP after ten years.
The effective tariff rate – which is the ratio of tariff revenue to the value of imports – peaked at about 11% last year and is currently 8%, although net of refunds the figure is temporarily zero.
This is the highest effective tariff rate since World War 2, but is much lower than the 19-22% estimated rates based on announced tariffs. This divergence reflects exemptions granted by the White House, US importers switching to cheaper goods, and China looking to have rerouted some sales to the US through lower-tariff countries.
Refunds – which are usually small – matched revenue in May and should continue to do the same for some months. This is because the government has been ordered repay importers almost $0.2 trillion (0.1% of GDP) after the Supreme Court struck down most of last year’s tariffs, agreeing with the earlier ruling by the Federal Court of International Trade that the duties were illegal (note that some narrowly-based tariffs were unaffected).
Although the White House immediately imposed a temporary replacement tariff at a flat rate of 10%, the effective tariff rate is likely to remain slightly below 10% given ongoing exemptions. Moreover, the temporary tariff – which has also been ruled as illegal by the Federal Court of Trade – will ultimately have to be replaced with better formulated alternatives when it expires later this month, while the window for legislating lasting tariffs is narrowing if betting markets and polls are correct in pointing to the Republicans losing control of the House in the November mid-term elections.
All this suggest that the uncertainty around tariff revenue creates some additional uncertainty around the fiscal outlook, where a historically large budget deficit and rising public debt have placed upward pressure on government bond yields via higher expected short rates and the term premium.
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
........
Investment Disclaimer
Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting www.coolabahcapital.com. Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT).
Forward-Looking Disclaimer
This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.
5 topics
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
Comments
Comments
Sign In or Join Free to comment
